Australia’s mining tax blunder is getting more serious by the day. That the tax has resulted in the need to remove the Prime Minister, a man who ‘saved’ the nation from the global financial crisis, has underlined the stupidity of the policy in Asian capital markets.
Unless there is a major reversal on the tax it is likely Asian capital markets will turn on Australia.
That means BHP Billiton’s Jacques Nasser, Rio Tinto’s Jan du Plessis and the other Australian miners are not just fighting for their current local mining profits but they are also fighting for all those Australians with large home mortgages.
Adding to the ranks of those on the miners side, are Australians with savings invested in the share market, as well as an army of mining sub-contractors. That’s why the polls were so devastating for Kevin Rudd.
At the moment the miners are standing firm and have declared that their advertisements will resume within two weeks if there is no major government backdown and that the campaign will continue for as long as is necessary.
But in the next day or so a compromise deal will be put on the table by the government which may still be devastating for Australia because I am not sure how many government politicians fully understand just how serious a mistake Rudd and Treasurer Wayne Swan made with the Resource Super Profits Tax.
But many miners will be tempted to accept a bad compromise deal because they don’t want to rock the boat too much and Gillard will place immense pressure on the industry. She can be very persuasive.
Fortunately Nasser and du Plessis are standing firm and will only accept a compromise that limits the retrospective impost to relatively small sums in boom years and allows new projects to proceed. The miners’ negotiating position will never be stronger than it is now so ‘after election’ deals are simply a recipe for disaster.
The miners have not forgotten previous government promises that came to nothing. Gillard promised to look after the miners in industrial relations and so they remained quiet. She let them down. Rudd promised to look after them in the emissions trading scheme. He looked after some, but most were let down.
At least at this stage the miners are saying that they are not interested in secret mining tax promises and want a clear statement from the government – even though that involves a huge back down by the government. But once the deal is done nothing will stop Labor being re-elected. There can be no more powerful bargaining tool.
And no one should forget that the reason why those with mortgages are on the front line is that Australian banks require that Asian and other institutions to lend them about 40 per cent of every loan they make. Australia’s enormous overseas bank borrowing puts Australian debt into a similar range to Italy and not far behind Spain when related to GDP.
The suppliers of those loans are now watching what the Gillard government does because the world looks like slowing rather than accelerating growth. In a global slowdown, our banks will find it hard to maintain their huge overseas borrowing (let alone increase it) if the government forces a bad compromise down the miners throat. This will mean less money for homes and/or higher interest rates. Once those with mortgages discover that they are in the front line of the mining battle, then the Gillard honeymoon will be over.
This article first appeared on Business Spectator.